How to retire in your 40s with $60,000 a year for life

How to retire in your 40s with $60,000 a year for life

A 44-year-old doctor and her husband want to retire and generate $60,000 a year

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Joanna and Charlie A. are both 44 years old and live in London, Ont. Joanna, a physician, has spent the last 20 years managing the family’s investments and next year, she wants to hang up her white coat and dedicate herself to freelance writing—a side hustle she’s had for several years now. In fact, Joanna’s written several articles for magazines and websites and looks forward to dabbling in fiction writing. To do so, she’s ready to give up her well-paying full-time day job at a southwestern Ontario hospital.

“My writing has always taken a back seat to my medical career,” says Joanna, who has two kids, ages 12 and 8, and is married to husband Charlie, also 44 and an environmental engineer. “And even though I do enjoy medicine, it’s getting tougher for me to do. There are lots of night shifts and that takes away from my spare time to write, which is my passion.”

Joanna says she’s ready. Apart from owning their own home outright and having no debt, the two have had careers that have allowed them to prosper. Joanna and Charlie have each earned healthy salaries that have given them a household income of about $200,000 annually.

Watch: See how Joanna and Charlie’s plan is explained in charts

Joanna has been a master investor for all the family’s investments and has a passion for DIY investing. But on top of that, Joanna and Charlie have also been super savers. And while Charlie doesn’t mind working a couple more years at his management job which pays about $100,000 gross a year, Joanna is ready to walk away from her full-time job altogether. “We’re closing in on $2 million in assets,” says Joanna. “If I don’t take the leap now and do the writing I love, then when?”

Over the year’s Joanna has read a lot of personal finance books but the most inspiration for her has been Andrew Hallam’s Millionaire Teacher. “I love the fact that he’s no-nonsense and sets out a good plan,” says Joanna. “I even emailed him a couple of questions and he answered, which was inspiring in itself.”


Joanna and Charlie’s Investments


Asset Amount
Joanna’s RRSP: $240,000
Charlie’s RRSP: $189,000
Joanna’s TFSA: $60,000
Charlie’s TFSA: $71,000
Joanna’s corporation*: $931,000
Joanna’s unregistered investment account**: $180,000
Cash: $30,000
Total: $1,700,000

*(includes a $100,000 insurance policy)
**(split $90,000 in U.S. and $90,000 in Cdn accounts)


Right now, the couple’s investments—about $1.7 million—have an asset allocation of 25% fixed income and 75% equities, made up of several stocks, bonds, GICs, REITs and exchange traded funds (ETFs). That’s impressive, but Joanna thinks that the equity portion may be too high if she retires from full-time salaried work next year. “I don’t want to run out of money in my 70s or 80s,” says Joanna. “That’s a real fear when you retire from a full-time job this early.”

The couple’s portfolio is also over-diversified. In fact, it’s invested in over 50 different stocks and ETFs that are held in several different accounts—RRSPs, TFSA’s, corporate account, self-directed accounts and RESPs for her two teenage children. It’s an overwhelming task to manage this many financial instruments—even though Joanna is an avid DIY investor and has been for several years.

Related: A growth portfolio for the long term

But most of all, she worries about the likelihood of a pending and prolonged market downturn which she fears could decimate her investment returns. “I may be crazy but I think the stock market is about to correct and in that case, 75% is just too much equity for us if I retire from my physician’s job next year,” says Joanna. “I also want to vastly simplify my portfolio and get an asset mix with financial products that will take me through the next 50 years.”

Joanna needs a simple portfolio that will provide her with $60,000 gross annually. “Charlie will work three more years or so and we’ll live completely on his income for that time but I’d still like to run the numbers assuming I need $60,000 after tax starting at age 45,” says a very cautious Joanna. “It’s painful for me to sell some of my holdings out of equities,” says Joanna.

“But I plan to draw on the fixed income portion of the investments to achieve the $60,000 annual withdrawal for the first five years that I’m retired—from age 45 to 50,” says Joanna. “But after that, I’d like a portfolio that’s 40% fixed income and 60% equity and I’d leave the 60% equity to grow. But I’m not sure that’s a good strategy for the long term. Can I get $60,000 total after-tax income annually using this strategy?

Joanna has three questions. She’d like to know what an appropriate percentage of fixed-income holdings would be for a young retiree like herself at age 45. “We’ll live on Charlie’s income for the next three years,” says Joanna. “Plus, we have $160,000 saved for the kids in RESPs so I don’t think we have to worry about paying for their university studies.”

Joanna’s second question is what financial instruments should make up her fixed-income portion, which is the portion she will be drawing on, and in which account should she keep this fixed-income allocation—her RRSPs or TFSAs? Or her non-registered investment account. “Since I’ll be drawing on the fixed-income portion of my accounts, should I hold bond ETFs? Dividend-paying stocks? GICs? What makes the most sense in my situation?” wonders Joanna.

Related: Build a portfolio to leave a legacy

And finally, right now the couple’s portfolio holds several stocks and ETFs. “I really want to simplify this down to just a few holdings,” says Joanna. “How can I simplify my holdings, keep costs low and be diversified enough to carry us to age 100. That’s the million-dollar question.”

WHAT THE EXPERT SAYS

“There’s a lot of moving parts here,” says Allan Norman, a chartered Investment manager and certified financial planner with Atlantis Financial in Barrie, Ont. “And I can understand why Joanna wants to simplify things. An accumulation plan is simple when compared to a de-accumulation plan.”

Here is Norman’s complete plan for Charlie and Joanna A.:

I’ll assume Joanna wants to continue managing the family finances so I’ll run through my thought process so she can make changes as time moves on.  Then I’ll provide suggestions, and answer the three questions.

I’ll be assuming a 60/40 equity/bond split with a return of 5.3% after an MER of 0.25%, and general inflation of 2%, which is based off the Financial Planning Standards Council (FPSC) return assumptions . I’ve also assumed there will be no advisory fees as Joanna will be managing things herself, and I’ve estimated age 65 CPP at $8,600 since Joanna and Charlie are retiring early.

Joanna has asked for a gross income of $60,000/yr, but $60,000 gross from an RRSP is a lot less money in your bank account than $60,000 from a TFSA. In Ontario, the difference is just over $11,000 per year. I’ll assume a net (after tax) income of $60,000/yr.

When designing an income plan Joanna needs to look ahead to future years and anticipate what government benefits, credits and clawbacks she may receive.  Benefits, credit, and clawbacks are income tested so she should always be on the lookout for ways to keep her “taxable” income down.

These are some of the things Joanne needs to watch for, and plan for:

  1. Marginal Tax Rates. Their incomes in relation to the next tax bracket?
  2. The Canadian Child Benefit (CCB). With an “adjusted family net income” of under $30,000, they’ll receive a tax-free benefit of $5,400/child between the ages of 6 and 17.  With two children, the amount is clawed back by 13.5% for every dollar they are over $30,000.  For most couples, adjusted family net income is the combined amounts on line 236 of their tax return.  Joanna should be able to structure their income so they’ll receive some of this benefit.
  3. The Age Amount starting at age 65. They’ll likely lose some of this credit.
  4. The OAS claw back starting at age 65. This will be an issue if they’re not careful.
  5. The Guaranteed Income Supplement (GIS). They won’t get this one.
  6. Tax on dividends/distributions on their non-registered and corporate account. The interest on GICs and bonds will add to their taxable income, and dividends actually artificially increase your net income due to the gross-up. The investment income earned inside the corporation is likely taxed at a rate higher than Joanna’s personal marginal tax rate.

Now let’s move on to the income plan, and then we can get to the investment plan.

  1. Once Charlie has stopped working they’ll maximize the CCB by keeping their family net income below $30,000. Joanna will draw $15,000 in dividends from her professional corporation each year until their youngest child reaches age 18. To bring their income up to $60,000 after tax, less the CCB, they’ll draw from a combination of their non-registered account and TFSA. The withdrawal amount from the non-registered account will be dependent on its adjusted cost base. For example, $20,000 from the non-registered account and the remaining amount from their TFSA.
  2. Most investors have distributions re-invested back into their non-registered investments. Joanna should have the distributions paid to their bank account to use as income. There’s no point in re-investing the distributions, paying tax, then withdrawing, and paying more tax.
  3. Once their youngest has reached age 18, the question becomes “Where to draw the income?” Joanna should draw $60,000 in dividends/yr. inflated at 2% from her professional corporation.  Joanna’s not able to split the dividend income with Charlie, which is why it should be used now and the RRSP/RRIF accounts left to age 65.
  4. At the same time, Charlie should draw $11,600 from his RRSP, plus enough to make annual contributions to his and Joanna’s TFSA.

With this approach Charlie will deplete his RRSPs by age 65, providing a greater ability for Joanna to split her RRIF income with him.

At age 65, Joanna will stop the dividend payments from her corporation and convert her RRSP to an RRIF. Then she’ll draw a pension income she can split with Charlie. Joanne’s RRSP/RRIF will run out at about age 80, so back to drawing dividends from the corporation.

This approach will provide Joanna and Charlie a tax-efficient income, so their investments will last longer. The final estate will be left with close to $8 million dollars, made up of non-registered accounts, TFSAs, the corporation, and the home (valued today at $400,000). There will be very little tax to pay on the final estate relative to its size.

One thing not discussed is the life insurance policy in the corporation. Joanna may move some of her corporate investments into the insurance policy.  If she does that, Ontario charges a 2% premium tax and the investment accounts generally will have a higher MER. On the positive side, the investment growth is tax-sheltered, and if she holds it to the end, the death benefit, plus the investments inside the policy, will flow out of the corporation tax-free through the capital dividend account.

A question Joanne and Charlie should ask themselves: Is $60,000/yr. after-tax enough?  Do they want to leave a large estate?

With a plan in place, it’s much easier to address Joanne’s specific questions.

  1. What percentage of fixed income should they have? There is a financial and a behavioural side to this question. On the financial side, we’ve just run a plan with all accounts at a 60/40 equity/bond split. It works. Joanna and Charlie don’t need more than 60% equity funds unless their goal is to try to make more money. The nice thing about a 60/40 split is that when markets drop there is money available to move from bond funds into equity funds; buy low.

On the behavioural side, if they have a 60/40 split and the portfolio drops 20%, what will they do?  If Joanna knows she wouldn’t sell out, then a 60/40 split is good and she may consider adding more equities, but it is not necessary. We use this 11 minute behavioural questionnaire to help us with this one.

  1. What products should they choose for fixed income and where should they hold them?

If Joanna wants to keep things simple she should use a bond fund for fixed income. It’s a little more tax efficient than a GIC, it can be cashed in at any time, and I believe that over a five-year period she’ll earn more with a bond fund than with a five-year GIC. It’s possible a bond fund will go negative, but generally, if that happens equities are up, so Joanne could draw their annual income (lump sum) from the equities and deposit it in the bank to be used for that year’s income.

I’d be careful putting dividend-paying stocks in the same category as bonds and GICs. They’re stocks and they fluctuate up and down. I’d be more conservative and stick with the bond funds.

The tougher part of this question is where to hold the bond fund. One thing to consider is that every portfolio doesn’t need to be 60/40. Remember dividends/distributions are taxed in the non-registered and corporate account, so Joanna may hold more equities in those accounts, and more bonds in the TFSA and RRSP. Having said that, the accounts from which Joanna and Charlie will be drawing from should have three to five years of future income invested in GICs or bond funds. For example, when drawing $60,000 in dividends from the corporation Joanna will want a minimum of $180,000 to $300,000 (5 years. x $60,000) in bonds. If the market drops she’ll be glad she has a secured source of income.

  1. How to simplify, keep costs low, and be diversified? The smart-aleck answer is to say, “Buy a 60/40 low MER fund and be done with it”. Simple, but you know, there is nothing wrong with that approach.  What if Joanna went to a fund company and selected their Canadian, U.S., and International funds, and added a bond fund?  Would that be any different than if the same company took those same funds and wrapped them into one fund? That one fund would also be more tax efficient and it would maintain their asset allocation.

Joanne noted that, with all the different holdings she has, she’s averaged about an 8% return over the last five years.  If I look at the Dimensional 60/40 fund over the last five years, it has averaged about the same and has over 9,000 different holdings.

The alternative approach is to continue with her Vanguard funds or chose from the MoneySense All Stars  but just hold a Canada, U.S., International fund, 10% REIT funds and add a bond fund. Don’t hold the REITs in your corporate or non-registered account because they usually have a higher taxable distribution. An indexed approach is well- diversified. I know it probably appears too simple but it works.

Overall, things look good. Joanna and Charlie are able to simplify their holdings to a 60/40 equity/bond split and have the income and comfort they’re looking for. In addition, they now know they have enough money to draw more than $60,000/yr if they like.

Finally, I always like to test my thoughts before making suggestions, so here is a video summary of the income plan described.

Allan Norman, M.Sc., CFP, CIM, Atlantis Financial/IPC Investment Corp

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